Where to Find the Best Canadian Small-Cap Stocks
One of the fun activities that comes with being a small-cap stock analyst is searching for new stocks to cover for Cabot Small-Cap Confidential subscribers. I’m not limited to certain sectors or geographies; I can cover Canadian small-cap stocks, U.S.-listed small caps or European small caps. If a company has a market cap under roughly $3 billion, it’s fair game!
I’ll often turn to the Canadian stock exchanges to see what’s going on just north of the border. When looking in Canada investors can lump stocks into one of two large buckets.
The first bucket is the Vancouver Stock Exchange. These stocks usually have market caps under $250 million and often trade for less than a dollar. You’ll find a lot of mining and oil and gas stocks in Vancouver, but some technology stocks too. For investors looking to narrow this universe down a little more they can start with the Venture 50 list.
The Venture 50 list is published at the beginning of every year by the TSX Venture Exchange. It covers the exchange’s 50 best performing stocks over the last calendar year based on three equally weighted criteria: market cap growth, share price appreciation and trading volume amount. Additionally, each company must have a market cap of over $5 million and a share price greater than $0.25.
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The second bucket is the Toronto Stock Exchange. These are comparatively more established companies and there’s a wider selection of stocks to choose from. Some companies go public directly on the Toronto Stock Exchange, while others uplist from Vancouver once they satisfy the listing requirements.
While broad market performance in both the U.S. and Canada has been spotty in the second half of 2019, a few Canadian small-cap stocks stand out as being worth your attention right now. Here are five to check out.
These Five Canadian Small-Cap Stocks Are Looking Good
Note: All prices stated below are in Canadian dollars (CAD$), unless otherwise noted.
Canadian Small-Cap Stock #1: Cargojet (CJT.TO, CGJTF)
In 2001 a Canadian discount charter airline named Canada 3000 was the largest charter airline in the world, delivering passengers to 90 domestic and international locations around the globe. But then the September 11, 2001 terrorist attacks destroyed what appeared to be a nice growth trajectory.
On November 9, 2011 the company’s fleet was grounded, leaving 50,000 vacationers stranded. Citing a 50% decline in air traffic, management declared bankruptcy, and the asset grab was on.
Out of that mess emerged Cargojet, a pure-play provider of time sensitive overnight air cargo services. The company is run by Ajay Virmani, who had acquired 50% of Canada 3000 just months before the Trade Tower attacks. He purchased the other half in February 2002 and has been the CEO and President of the company ever since. The company has a market cap of $1.14 billion.
Cargojet’s pitch is that it delivers time sensitive air cargo across North America and select international locations utilizing its fleet of all-cargo aircraft. Its co-load network consolidates cargo from customers and gets it where it needs to go on time and without damage.
Destinations include 14 major Canadian cities and international routes between the U.S. and Bermuda, Canada and Germany and Canada and Colombia and Peru. Specialty charter services are also available across North America, and to the Caribbean and Europe.
The bulk of revenue (55% in 2017) is generated through overnight services, with aircraft charged out on an Aircraft, Crew, Maintenance and Insurance (ACMI) basis making up a smaller proportion (10%), and charter revenue making up the smallest amount (8%). Around 26% of revenue is classified as “pass through” revenue, which mainly includes fuel charges passed on to customers. Historically, the Canada Post Group of Companies and Air Canada have been major customers.
The company has performed well in recent years and continues to benefit from e-commerce trends. In 2017, revenue grew by 16% to $295 million and EPS surged to $1.97 from $0.99. In 2018 revenue was up 189% and gross profit expanded by 5.6%. In 2018 EPS dipped to $1.50 from $1.93 due to higher expenses. Adjusted EBITDA hit a record high of $128 million. At the current price the stock yields 1.1%.
With a steady growth profile, shares have mostly trended higher for several years. There was an extended consolidation phase in early 2017 when the stock was stuck in the 42 to 50 range, but it broke out last fall and traded up to new highs above 65 by mid-March 2017. Another consolidation phase (in the 62 to 68 range) lasted until the beginning of August, then shares broke out again on the back of Q2 earnings and rallied as high as 87.5 in October. That was the high and shares fell with the market in the end of 2018. That said, they roared back in January and February 2019 and are on the verge of punching through overhead resistance and up to multi-year highs.
Canadian Small-Cap Stock #2: Eco Atlantic Oil & Gas (EOG.V)
When I wrote about Eco Atlantic in October 2018 the stock was trading around CAD 0.56. Given the ensuing meltdown in the price of crude oil, which fell by roughly 30% by mid-December and hasn’t recovered all that much through early March 2019, you’d think this small-cap oil and exploration stock would have suffered too. But it’s up by 150%!
First the backstory. Atlantic Oil & Gas’ exploration activities are focused on offshore Namibia and Guyana. As with most junior exploration companies, a lot of the pitch here is based on having great property that’s close to proven reserves.
In Namibia, the company has interests in four offshore blocks in the vicinity of blocks with farm-in activity from majors. It’s notable that Eco Atlantic is partnered with Tullow Oil, AziNam, ONGC Videsh, and NAMCOR, and is operator on three of the four blocks. In Guyana, Eco Atlantic is partnered with Tullow and Total.
The stock’s doing well because back in September Total exercised an option to acquire a 25% working interest in the Orinduik block, offshore Guyana, for $12.5 million. That capital is expected to cover Eco’s cost to drill two wells and reimburse the company for some back costs related to 3D seismic survey work.
Then in February management announced the partners had contracted a drilling rig, the Stena Forth, and that drilling is expected to begin in June 2019, targeting the Jethro-Lobe prospect. The estimated chance of success is currently 45% and management believes there could be 250mmbbl of gross prospective resources.
Africa Oil (AOI.TO), a smallish exploration company that was the first to strike oil in Kenya, also took a stake (about 19%) in Eco Atlantic (for $14 million) and that company’s CEO, Keith Hill, was appointed to the board. This adds another layer of legitimacy to Eco Atlantic as Africa Oil has had relative success with its partner Tullow (and now Total and CNOOC too) in East Africa, even though the timeline to first oil there has been pushed back for years.
Eco Atlantic’s stock is also gaining some notoriety for making it into the TSX Venture 50 for the second consecutive year!
Eco Atlantic’s chart looks constructive going back a couple years, with a long consolidation period in 2017 broken up by a nice rally since Africa Oil came to the table last November. There was an extended consolidation phase in the middle of 2018 then the stock rallied to fresh highs in September when Total decided to step in. There was yet another consolidation phase that lasted into early 2019, then shares took off again, rallying up to 1.4 by the beginning of March.
With drilling activity starting in roughly three months there should be some near-term excitement for investors. Eco Atlantic has a market cap of $226 million, and trades in the U.S. as ECAOF.
Canadian Small-Cap Stock #3: Cronos Group (CRON)
Cronos Group was the first Canadian marijuana stock to gain listing on the Nasdaq (others have followed in its footsteps). The company is one of the top Canadian marijuana growers serving that country’s legal cannabis market. It has spread its reach through ownership of several smaller operators, each of which maintains its own brand.
Cronos helps with the brand development, growing technologies, capacity and distribution, and it has relationships in overseas markets, including Israel, Germany, Latin America and Australia, to try and spur growth outside of North America. A joint venture with MedMen, California’s largest cannabis retail chain, is likely to help maintain growth on this continent too. Recent deals with Delfarma (Poland-based pharmaceutical wholesaler) and Cura (oils), plus a capacity expansion project, all serve to help Cronos expand its footprint around the globe.
There is big news on the partnership front too. Shareholders recently approved a U.S. $1.8 billion investment (roughly a 45% stake) from tobacco giant Altria (MO). It’s no secret that cigarette smoking is on the decline whereas cannabis is on the rise. Altria and Cronos are expected to work together on vaporization technology, pre-rolled cannabis products, product standardization and distribution.
Cronos has been growing quickly. Revenue is up 325% through the first nine months of 2018. That pace of growth reflects the early-stage nature of the company, which has generated just U.S. $10.2 million in revenue over the last nine months. EPS over the same time frame is U.S. -$0.04. The growth trend illustrates that strategies to grow patient enrollment, begin bulk sales to other Canadian licensed producers, and export overseas, are working well. To pull out just one datapoint, kilograms sold in Q3 2018 were up 213%.
Shares of Cronos mostly moved sideways from mid-March through mid-August 2018. They rallied up to 13.75 last September, then a big retreat took shares back to 6.8. A rebound in the sector, and the Altria news, pushed Cronos back up starting in November, then shares rallied hard off 11 at the beginning of 2019 and ran all the way up to 23 by the end of January.
It’s likely to continue to be a high-profile stock that will be volatile at times, but the long-term potential is certainly compelling. Cronos has a market cap of U.S. $4.2 billion.
Canadian Small-Cap Stock #4: Jamieson Wellness (JWEL.TO)
Jamieson Wellness is relatively new to the Toronto Stock Exchange, having just gained listing in July 2017. But the company has been around for almost 100 years! It was founded in 1922 and since then Jamieson has grown to be Canada’s leading branded manufacturer, distributor and marketer of natural health products. The company’s track record and focus on purity, potency and quality has helped it to become an iconic brand in the wellness industry. It has a market cap of $755 million.
The company has two divisions. Its Jamieson Brands segment sells a full line of branded vitamins, minerals and supplements (VMS), over-the-counter remedies branded as either Jamieson or Lorna Vanderhaeghe Health Solutions (LVHS), and sports nutrition products branded as either Progressive, Precision, or Iron Vegan.
It also has a Strategic Partners segment through which it offers comprehensive manufacturing and product development services on a contract manufacturing basis to blue-chip consumer health companies and retailers around the world.
Broadly speaking, VMS and sports nutrition are two of the biggest and fastest-growing areas of the consumer health industry. Jamieson is a way for investors to participate in this growth with Canada’s top-performing VMS company by sales, not to mention the country’s #1 consumer health brand.
In Canada’s food, drug and mass stores, the company holds 25% market share. But while its products are sold in 10,000 locations across Canada, you don’t need to live in in the country to enjoy the benefits; Jamieson distributes products in over 40 countries.
Sales were up 6% to $320 million in 2018, while adjusted EPS grew by 21% to $0.85. In 2019 management expects revenue to grow by 5% to 8.8% (to $336 – $348 million) and to deliver EPS of $0.90 – $0.95 (up 5.9% to 11.8%).
Look for the company to continue expanding overseas, especially in China and India, the latter of which it has recently entered through an exclusive five-year distribution agreement with MedPlus, the second-largest pharmacy chain in the country.
The company went public in mid-2017 and was a solid performer until last September when the stock topped out around 27. It was hit hard in October and November, when it fell briefly below 19. Then it made a run back above 22, before retreating to 18 in February. Shares rallied after the company reported fourth quarter 2018 results on February 27. I could see starting a small position around here and buying a little more if Jamieson is able to get back above resistance in the 22 to 22.5 area.
Canadian Small-Cap Stock #5: Questor Technology (QST.V, QUTIF)
Questor is a $117 million market-cap company that develops clean air technologies to safely and cost effectively improve air quality, energy efficiency and greenhouse gas emission reductions (including methane). Current systems include high efficiency waste gas combustion systems, power generation systems and water treatment solutions (which use recovered waste heat). The company also licenses its incinerator technology.
These systems are used in landfills, geothermal and solar projects, waste water treatment plants, cement plants and oil and gas drilling pads. The company sells and rents equipment and provides field combustion services.
Revenue was strong through 2014, but then fell off through the end of 2016. In 2017, sales came back strong and surged by 174%, driven by large volumes of rentals as well as rebounding sales of equipment. Earnings also jumped, to $0.15 from a loss of $0.02 in 2016. Colorado’s tight oil and gas plays in the Niobrara/DJ basin had been a particularly strong growth driver.
Through the first nine months of 2018 revenue has grown by 38% (to $17.5 million) while EPS has nearly doubled, from $0.11 to $0.21.
The company hit some bumps in the third quarter, which led to a big correction in the stock. First, Prop 112 in Colorado was a divisive issue and had been expected to be bad for oil drilling activity in the state as it had the potential to multiply the setback between houses and drilling rigs to 2,500 feet. It would have done the same for water sources, which was estimated to rule out over 80% of nonfederal land in the state. It was ultimately voted down, but not before Questor’s stock sold off.
Second, a customer canceled an incinerator order after receiving just 75% of it, meaning $4.5 million was cancelled. Uncertain future expectations led management to cut capital spending during the quarter and divert some resources to North Dakota and Texas. Management has begun spending again, but the market doesn’t like uncertainty and Questor had it in spades in Q3, which was a horrible period for the broad market.
The stock began to recover in the last three months of 2018 after new rental contracts worth $5 million were secured in two new markets, North Dakota and Texas, as well as in its existing Colorado market. Then in January Questor received a purchase order to supply its clean combustion incineration technology with its power generation equipment at three oil and gas production facilities in Mexico. The total amount of the award is $5.8 million.
With the wind at its back again shares of Questor broke out to fresh highs above 4.5 in February. They topped out at 5.0 in the middle of the month and as of the beginning of March are seeking support in the 4.5 area. This could be a good entry point for a starter position or adding a few shares to an existing one.
The Best Small-Cap Stocks for 2019
I haven’t done a deep dive into any of these five Canadian small-cap stocks yet. And none have made the cut to be included in Cabot Small-Cap Confidential, where we have an average gain of 70% in current stocks and locked in average gains of 39% in 2018.
But all seem compelling to me for different reasons right now.
As always, if you’re interested in getting my research on the best small caps in the world, start your subscription to Cabot Small-Cap Confidential by clicking here now.
Tyler Laundon is chief analyst of Cabot Small-Cap Confidential. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!Learn More
This post has been updated from an original version.